Ge's Hard Lesson: Pay Cuts Can Backfire

When international competition hit the U.S. full force in the early 1980s, most manufacturers slashed labor costs by extracting concessions or shipping jobs overseas. Some now wonder if this was wise. If getting ahead turns as much on quality and productivity as on cost, they reason, maybe there's a better way. That's the thinking behind one change in plans at General Electric Co.

Back in 1987, GE's electric motors division was in trouble. A chief domestic rival, nonunion Emerson Electric Co. in St. Louis, paid its workers $7.20 an hour, vs. GE's $11, GE says. Both companies had opened motor plants in Singapore and Mexico, where wages were 80 to $1.50 an hour, and GE remained No. 1 in motors that go into everything from refrigerators to computer disk drives. But the division's revenues had fallen by 7% since 1984, to $710 million. Return on sales was less than 2%, vs. an average 6% at other GE units--even though the division had in the course of a decade shed 5,300 jobs, 42% of its total.

BLUNDER. CEO John F. Welch Jr. had threatened to jettison any GE business not No. 1 or No. 2 in its market, so the division decided to act. It demanded that its hourly workers accept an 11% cut in pay and forgo scheduled raises of $1.30 an hour. They did. Then, after closing 2 of its 12 motor plants, GE guaranteed the remaining 5,400 workers their jobs for three years and sank $200 million into new equipment and product development. "At the time, investing at existing wage levels didn't seem sane," says Frank P. Doyle, GE's senior vice-president for external and industrial relations.

What looked like a sweet deal then, GE now sees as a blunder. True, the pay cuts saved $25 million a year. And the plant closings eliminated 1,000 jobs. But both company and union officials say worker morale sank like a stone. "Productivity went to hell," says Doyle, although he won't give figures.

So, the division is remaking itself again. This time, the strategy centers around modern techniques: just-in-time inventory systems, quality control, design-for-manufacture, and Japanese-style teams of seven to eight workers who rotate tasks and make daily decisions about how work should be done. GE hopes these approaches will offset its wage disadvantage--it still pays $10 an hour--by boosting efficiency. Indeed, in the past year the division's productivity gains have been "above moderate," says a GE official, even though the new strategies are just being implemented. Welch has given the unit until 1994 to boost returns. By then, GE wants it to match the efficiency gains--generally, 4% to 8% a year--in its other units that have tried teamwork. "The biggest change in our thinking since 1988," says Doyle, "is that we now see that the productivity available is really extraordinary."

NEW CRITERIA. It's too early to tell if the new tactic will work. GE still may farm out some labor-intensive work on motor parts such as switches or washers. And the bad feelings from the wage cut persist. In early May, 1,000 workers in Fort Wayne, Ind., voted down contract changes their union negotiated to make teamwork blossom, in part because some people would have lost up to $5 an hour in incentive pay. But Fort Wayne has set up some teams, and union leaders want them to work. "If we're going to stay in the motor business, we have to make it profitable," says Dewey D. Minton, who heads the GE contingent of the International Union of Electronic Workers.

If the latest effort works, does it mean GE erred in giving up on such businesses as TVs and housewares, which seemed doomed against low-wage rivals? GE officials say they haven't done such hypothetical calculations. But, adds Doyle, "the decision criteria would be different today."

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